ECH12030 - Computations: Benefits in Kind - Employer Willing to Settle Employees' Liability

See ECH15005.

Where an employer is willing to meet the employees' liability, you should explain

• that the tax underpaid will need to be based on the 'grossed up' value of the benefit
• 'grossing up' takes account of the additional liability on the further benefit to the employees of having their tax paid for them.
• NIC is due on the tax borne on behalf of the employees as by agreeing to settle the employees’ liability the payment is regarded as earnings for NIC purposes.

The 'grossed up' value is

• a calculation of the tax due on the benefit to be paid by the employer, then
• grossing up of the total tax by reference to the current year's basic tax rate.

For example a computation on an annual benefit of £600 spanning two tax years is set out as follows

• 2006-2007 £600 at 22% = £132
• 2007-2008 £600 at 22% = £132
• Total = £264

Settlement agreed in 2008-2009 when basic rate 20% therefore

• £264 x 100/80 = £330

Grossed up tax for inclusion in the settlement is £330.

Class 1 NIC on the tax borne assuming category A is therefore

• £330 x 23.8% (employee + employer) is £78.54 rounded to £78 (ECH12015).

See the example Accommodation Benefit provided to John Smith

You should bear in mind that

• higher rate tax may be applicable to some employees, and
• where appropriate 'grossing up' should reflect this
• the appropriate category of NIC applies, and
• the UEL for the employee may have been reached therefore the primary NIC will be 1%.

You should also

• seek agreement from the employer to include the NIC on tax borne in the settlement.

Note: Where the employer agrees to settle NIC on tax borne it becomes due when the settlement of the tax is agreed as indicated above - ‘the current year’. It follows that as the employer has not submitted any returns for the current year, no penalties can be considered on the NIC paid, see ECH21010.

If the employer resists settlement

• because of the 'grossed up' element you should consult the manager with a view to seeking advice from TAA Liverpool (This text has been withheld because of exemptions in the Freedom of Information Act 2000) 
• for any other reason see ECH12035.

(This text has been withheld because of exemptions in the Freedom of Information Act 2000)

For examples of how to create computations using ECLSS see ECLSS0480 to ECLSS0740 and for actual examples see ECLSS0940.